Jim is the editor of Strategic Intelligence, Chief Global Strategist for West Shore Funds, former general counsel for Long Term Capital Management, and a consultant to the U.S. Intelligence community and U.S. Department of Defense.

by: Elaine Diane Taylor

Topics:

Crash of 2008
Glass-Steagall
Complexity Theory
Policy Solutions

Part 1

Jim Rickards

It would be a much healthier state of affairs if a number of bankers had gone to prison for their crimes that contributed to the Crash of 2008.

JP Morgan is one of the great criminal enterprises of all time. That’s not a rant or an opinion, they’ve actually pleaded guilty to crimes, and have deferred prosecution agreements. One’s enough to make you a criminal, but given the number and scale of the enterprise it makes it one of the great criminal enterprises of all time.

Jamie Dimon is hailed as a hero for his stockholders, but if you give me zero interest rates, underpriced insurance, unlimited derivatives, implied government guarantee and “too big to fail” then I can make $16 billion too. A trained monkey can make $16 billion. There’s no talent there.

Max points out that the most prudent thing to have done at the time of the Crash of 2008 would have been to exercize the rule of law.

Jim agrees. Bankers don’t save the system; they save themselves. They saved themselves in 1998 with the Long Term Capital (LTC) bailout. Jim negotiated that bailout.

The banks bailed out LTC, but they weren’t saving LTC, they were saving themselves from the losses that would have arisen if LTC had gone out of business.

LTC stayed in business with the banks’ money, but the banks took over their balance sheet and saved themselves.

The same thing happened in the 2008 crisis — the bankers saved themselves. The bankers woke up in late 2009 and said, “We can’t believe it. We still have our jobs, our multi-million dollar bonuses, and nothing bad happened to us. We can start this over again!” Which they promptly did.

There was no accountability at all.

This is part of what’s called a loss of confidence in the system.

Timothy Geithner, the Secretary of the Treasury at the time, intervened with the Justice Department and told them not to prosecute. Geithner said that confidence is fragile, and if we have public criminal prosecutions of these leading bankers then it will undermine confidence and maybe start the crisis all over again.

What business does the Treasury Department have telling the Justice Department not to follow the rule of law?

But that’s what happened.

The bankers saved themselves.

GLASS-STEAGALL

In the 1920s bankers realized they could make garbage loans (high risk), package them as securities, and sell them to their customers, leaving the customers with the losses.

In 1933 – 1934 the Congress said, “Okay, from now on you can take deposits and make loans or you can originate and underwrite securities. But you can’t do both. There’s a conflict of interest if you do both.”

That was the law for 65 years. All the way up to 1999.

Suddenly in 1999 the Congress decided that they were smarter than the Congress in 1934, and they repealed the law. It was under Bill Clinton but it was both parties.

Now, Stacy points out, Bernie Sanders said we need to re-instate Glass Steagall and Hillary Clinton replied it was absurd and not possible.

Jim notes that HIllary Clinton is in the pocket of the banks.

Repealing the Act is possible.

The original Glass-Steagall Act (also called The Banking Act of 1933) was only 5 or 6 pages.

Dodd Frank, which repealed it in 1999, was about 2,000 pages.

Glass-Steagall just said, “You can take deposits and make loans or you can underwrite securities. You can’t do both.”

It didn’t say a lot more than that but it was very effective.

But Republicans and Democrats, in it together in 1999, repealed Glass-Steagall.

Guess what happened?

Within eight years bankers originated garbage loans, put them into securitiesjust and sold them to their customers.

The banks did exactly what they did in the 1920s. And it came as no surprise that they collapsed the system again, the same way they did in 1929.

It was a replay.

Max points out that Roosevelt is critisized for socialist-type policies but he brought in the Securities Act of 1933 and 1934, which laid the groundwork for the American Century on Wall Street. It was the bedrock for rules like the Short Sale rule.

Stacy says we have a few large oligopolies, like telecomm, pharma and banking, where three or four control everything.

Jim says the new theory for Anti-Trust Law is that you don’t break things up just because they’re big, you break things up if it’s in the best interest of the consumers. That test should be applied to banks.

2. They don’t operate in the best interest of the citizens or the economy.

3. It would get rid of the systemic risk.

This is no different than the ski patrol throwing dynamite to break up avalanches before they kill skiiers.

When the snow is out of control you don’t wait for it to fall down and bury a village, you throw dynamite to break it up.

That’s not just a metaphor for breaking up the banks. The actual physics, dynamics and mathematics is the same. The banks should be broken up pro-actively before it cascades out of control.

COMPLEXITY THEORY

The difference between complexity and a complex system is that a system can be complex, for example a Swiss watch.

The watch can be taken apart, and you see that it’s complicated, but it’s not complex.

A complex system is where the pieces change into something else — called a phase transition.

In a complex system, when things get big and densely connected then you have something called “emergent properties”.

(An emergent property is a property that the system has but the individual parts in the system don’t have. For example, the heart is made up of different parts, but you need all the parts together to be able to pump blood. Pumping blood is the emergent property. An unexpected negative emergent property is sometimes called a Black Swan.)

You can put this theory in mathematical space and scaling metrics, and actually determine the likelihood and magnitude of a financial collapse.

Jim is not a doom and gloom guy. There’s hard science behind it.

Max says the global financial system is a complex system. It’s that side of the mountain that is built on hundreds of millions of dollars of derivatives contracts. When problems occur, as in 2008, then on an exponential basis you will have an entire systemic collapse.

Jim shows that when you expand the size of the system, say double the size, the risk does not go up double — the risk goes up exponentially. It goes up five, ten, one hundred times, depending on the slope of the power curve.

Reflection in the window overlooking Stanley Park and the North Shore of Vancouver.

Gold is $1,350.40 U.S. per ounce

A nice little bump up.

The Sprott Natural Resource Symposium in Vancouver last week was a lovely event. The gold and silver industry in filled with positive people. I met and said hello again to many people who have inspired me and made me laugh. They love their industry and believe in what they do.

A great time again with Jim Rickards, learning, playing guitar and talking. We beat our time on the Grouse Grind this year, by a lot, and still had time to discuss complexity theory and how wonderful the world is. This is an immensely deep and knowledgable man who is brave in ways you can only brush the surface of in interviews. He cares deeply for society and people, and sacrifices his time for others.

Thank you to Rick Rule for such a gracious and informative symposium. We enjoyed a beautiful cruise of the Vancouver harbour in the stunning city setting.

Had fun meeting Josh Crumb of Goldmoney and chatting about my favourite subjects in the world — energy, physics, hiking and gold.

Nice to see Tekoa da Silva again, and get a behind-the-scenes preview of an upcoming interview.

Vancouver is stunning at the end of July.

Now is the time for me to create beautiful gold wearable art for men and women. Looking forward to the debut of the Golden Staff, with 1 gram of raw unrefined placer gold in handmade torch blown boro silicate glass. Setting up my studio now that I’m back in VanCity.

New music in the making. Love my guitar, freshly back from luthier Jake de Villier of Cresent Beach Guitars.

The Greek bank holiday and long lines to get a few euros for the day. Debt deals behind closed doors. The media telling us what opinions to have. China building islands in the South China Sea and claiming all the international waves. More dealing to come. More standing in line for those who owe. Who owes? There’s a long line of nations in debt and this is far from done.

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Preparing for the Fall live boutique album available on iTunes — featuring Wag the Dog, Black Swan Dive, American Pie and Gods of the Copybook Headings.

The copybooks of the early 1900s gave us all the wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. One of my gurus.

See the bankers wave their Wall Street wands and conjure piles of paper green. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea, and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm and we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.